The Parachute Has Opened

The headlong fall in world trade and industrial output in the six months after the Lehman Brothers bankruptcy and the Crash of '08 has slowed. Optimists may say that recovery is nigh. Pessimists will point out that while the rate of decline is less steep, unemployment is still rising in the G8 countries and output is still falling. A realist would suggest that while some signs of recovery are promising the real question remains how long that recovery will be sustainable.

Some form of recovery had to happen. Manufacturers needed to restock after the dramatic destocking of the past two quarters, and governments launched the biggest peacetime fiscal and monetary stimulus the world has ever known, now exceeding $2 trillion. On top of that, various monetary stimuli by central banks (and in China, by banks obeying government instructions to increase lending) exceed $3 trillion. In short, nearly 10 percent of global GDP has been pumped into the global economy, with the goal of fending off a new Great Depression. This is not so much stimulus as it is an unprecedented cocktail of steroids plus adrenalin plus amphetamines. It would make a corpse get up and dance.

This will undoubtedly produce some sort of recovery, starting later this year and continuing into mid-2010. It is less clear that this recovery can be sustained, for the following reasons:

1. Rising unemployment in advanced economies will continue to depress consumption.
2. The political will to continue this intense level of deficit spending is at best uncertain, particularly in the U.S. Congress.
3. Over the next 18 months, governments and corporate borrowers will seek to raise something in the region of $3.5 to $5 trillion in the bond markets. We have already seen the U.S. 10-year Treasury bond forced to offer 3.45 percent in interest to attract funds. The likelihood is that interest rates will rise yet further, dampening recovery and spurring inflation.
4. The price of oil is rising again, almost doubling in the past three months from $35 to $62 per barrel. Food prices are also rising, with U.S. planting acreage down and China having lost much of its winter wheat harvest due to drought. This will reduce the share of income available for further consumption.
5. China claims "recovery" to a 6.1 percent annualized growth rate in the first quarter of this year even though electricity output was falling by an average 5 percent over the same period, after sharp decreases last year. The record level of bank lending (under government instructions) was running at almost $700 billion in the first 12 weeks of this year, more than all of 2008. This cannot be sustained. The flow of investment is also shifting. In 2008, China was a net importer of foreign direct investment (FDI) to the tune of $35 billion; this year, it is expected to be a net exporter of $58.7 billion.

The greatest unknown that lies ahead is the degree to which the terrain beneath our feet has shifted and how far the fundamentals that underpinned the past two decades of globalization have changed.

Martin Walker is senior director of A.T. Kearney's Global Business Policy Council and a senior scholar of the Woodrow Wilson International Center for Scholars in Washington, D.C. His most recent book, the novel Bruno, Chief of Police, was published by Knopf in May.

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